Everyone hates GameStop and it seems like everyone in the media basically wants us to fail and wants them to succeed. And you've got a board that's making hundreds of thousands of dollars a year. They don't buy stock with their own money. They end up showing up to a handful of board meetings and they're making a fortune. You've got a management team that is grossly overpaid. There's nothing more American than basically risking your own capital.
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>> Ryan Cohen, welcome to the All-In Interview. Thanks for being here.
>> Thank you for having me.
>> I think it's been like a decade since you and I last had dinner in New York. This was before several chapters of your life unfolded. You're doing something really interesting right now, trying to acquire and run eBay, which obviously is a big story right now that takes us back 25, 30 years to the start of the internet. But I want to talk a little bit about your story first β maybe we can go back to the business you started, Chewy.
>> Tell me why you started Chewy. How did you get that idea?
We wanted to build something online and we were about to launch an online jewelry website. Did not know anything about jewelry. Went to a bunch of trade shows, bought hundreds of thousands of dollars worth of inventory, built the website, had the distribution β and then I was shopping in a neighborhood pet store. I had a poodle and I was going every few weeks, and it just hit me on one of my trips that I understood the product much better. It was a recurring revenue purchase. The market was still fragmented. The fact that there was still neighborhood pet stores at the time and they had not been disrupted by Petco and PetSmart was fascinating to me.
And then you had Amazon, which was established and had pet products since the '90s, but they hadn't really achieved real scale in the category. So the vision was to replicate the same experience that I had at the neighborhood pet store, but do it online and do it at scale. I looked at Amazon's best practices when it came to supply chain β fast shipping, having a great selection, being competitively priced β and then the experience at the neighborhood pet store of knowing the products really well. Everyone we hired were pet owners. It was all about market leadership as a low margin business.
Hindsight, not necessarily the best idea to go head-to-head against Amazon, selling 30 lb bags of pet food, but we executed really well and we grew really quickly. We had negative working capital and so it was a business that was able to get billions of dollars in revenue and not consume a lot of capital.
I understood from the beginning that the real competition was always Amazon. It was a game of pennies β the difference between failure and success was pennies in the red is failure and pennies in the black is success. So we had to operate hyperefficiently.
When we started Chewy for the first few years we just focused on food, treats, litter β all of the things that people are buying all the time. The thesis: if we treat our customers well, they're going to continue shopping with us. Handwritten holiday cards, pet portraits, 24/7 customer service. If there was ever an issue, we took care of the customer. The best referrals are word of mouth, and pet owners love to tell their friends.
>> You built and sold the business in 2017 for $3.35 billion. How did you build the management team to execute so well?
Staying on top of everything. It's 24/7 watching all of the numbers. I would stay in Google AdWords till 4 or 5 in the morning managing campaigns myself. I was negotiating directly with all of our major suppliers.
If our suppliers are sending us gifts in the mail, that's a really bad sign. It means we're overpaying. If our suppliers are telling us they never want to speak to us again, it means we're getting the right price. But getting people into that framework is not easy because the path of least resistance is basically to get along and to be nice.
>> How do you find great people and hold them accountable?
I look for will over skill. I had a woman that was running customer service β she came from working in an old people's home and she applied for the job many times. We didn't think she was qualified. She kept on applying. She was relentless. On paper she didn't have the right experience, but she had drive, she was motivated, she wanted to work, and she ended up being incredible. In general, it was finding people that are diehards that are just willing to put everything in, go all in, no pun intended β and basically be as psychotic as me. It was just a bunch of fellow psychopaths.
>> Psychopaths attract psychopaths, and the engine is running at that point.
>> Exactly. Exactly.
>> A's only put up with A's.
>> Exactly.
>> Do you regret selling Chewy when you did? It went public at like $20 billion market cap two years later.
As soon as I sold it, it just took off. Typical β if you talk to the investment bankers we're getting an amazing price, and then all of a sudden it goes public and there's a lot more than what anyone had guessed. Nobody has a crystal ball. Chewy was my baby. Everything works out for a reason in life one way or another. We wouldn't be having this conversation if I was still running Chewy. Or at least maybe we would, but it would be about dog food.
>> After you sold Chewy, you became a pretty active investor. Why did you go activist?
I looked for established businesses that have a strong historical track record of making money and typically are out of favor. When it came to GameStop, originally it was a passive investment and I owned under 5%. The CEO actually reached out to me β they were fighting an activist and they wanted me to join the board. They thought I was basically going to be their friend. My father had just died recently and they offered me a single board seat, and I'm like, if I'm going to do this β I looked at the board and they had a really large board and they're offering me a single board seat β it just wasn't attractive.
Then COVID β things got a lot worse. They were deemed a non-essential store basically on the verge of bankruptcy. The stock traded down significantly and I continued accumulating. I ended up going above 5%. At that point I needed to decide, am I going to file a G or a D? A 13G is passive. A 13D is where you are going to engage with them. That was an easy decision once I crossed over 5%.
I like the idea of going into a situation where you're basically running into a burning house. I originally did it as an investor because typically that's where you see opportunities β when there's a lot of pessimism and fear. The original thesis was that there's an upcoming console cycle and they're probably going to survive until then. As I got pulled in, obviously the business is completely different and the thesis has changed.
I learned a lot at GameStop. I went in and I had this bias from Chewy β basically everything that I learned at Chewy I was going to apply to GameStop. And it took me about just over a year to realize that was really really stupid. I hired a bunch of e-commerce people from Chewy and Amazon. I wasn't the CEO. I hired a CEO. The strategy was to make GameStop more like Chewy. And that was the wrong strategy. Once I became the CEO, I quickly adjusted because I looked at the financials and saw it didn't make any sense. Then it was maniacal cost cutting mode, efficiency β basically focusing on what GameStop is really good at, which is the pre-owned side of things. Ultimately that led us to collectibles.
The trade-in model worked really well β you could bring in a graded PSA card eight and above and we will give you cash on the spot. We buy back the card and we either sell it in the store or we bring it back to our warehouses and sell it online. Very similar to the trade-in model on hardware and software, and very extendable to trading cards.
[Numbers] Collectibles is now 42% of revenue, $350 million. Q1 revenue was $835 million, up 14% YoY. SG&A cut from $228M to $202M. $9.7 billion in cash, $333 million in free cash flow, and the board just authorized a share repurchase.
>> What makes you say "we should be doing acquisitions" instead of just building organically?
If you look at the size of the business that I can build organically with GameStop, it's nice. It's okay. But I like to do big things. As we've gone into the collectible space, I've come to appreciate eBay. The secondary market side of the business, the collectible side, the ability to provide liquidity to consumers β what we're doing in stores, eBay is doing online. There's so many aspects of the business that are similar except that eBay is global and has significant scale. And frankly, it's a business that I understand a lot better than physical retail.
>> Was there a moment you remember when you said "we should make a play for eBay"?
>> I was on the toilet.
eBay could have been Amazon. They had first mover advantage and were really the de facto marketplace online. But their execution wasn't great. It was great when it was founder operated. Since then, if you look at how much e-commerce has grown and how much market share they've given up β to category-focused new competitors, live shopping competitors picked off significant share, Shopify, social commerce, Amazon β eBay's been able to maintain a revenue base and generate earnings, but they haven't grown along with the rest of e-commerce.
>> Is Amazon over-earning?
They charge a lot of money to their sellers. Sellers like it because they move a lot of inventory, but they don't like the margins. I would not be interested in taking in first-hand inventory. I like the marketplace model. Going head-to-head against Amazon is not the most attractive business.
>> How would you summarize what's happened to eBay in the last 11 years since Donahoe left?
Every important metric is down. GMV is down, active users is down by 30 million. Operating earnings is down. Their operating expenses are over half of their revenues β for a business that has no inventory. Their sellers frankly aren't happy. To do business on eBay, they have to use all kinds of third-party tools outside of eBay because eBay is not providing those tools. Amazon seller central is soup to nuts. With eBay it's a pain and they alienate their sellers. In a marketplace model the sellers are the customer. Existing management isn't going to roll up their sleeves β they're going to go to outside consulting firms to tell them how to run their business.
>> Do you believe in building long-range operating plans? Or are you more of a responsive manager β diagnose and tactician, iterating almost in an agile way?
So there are three areas. Number one is on immediately improving earnings through cutting costs and pulling $2 billion of costs out of the business on the operating base of close to $5.5 billion of expenses. And $2.4 billion spent on sales and marketing for essentially no user growth. There's a lot of money to pull out there.
Live commerce β there's a large competitor that is completely crushing it and eBay has the users, eBay has the brand, they have a platform, but the platform sucks for a lot of different reasons. They don't have the content creators on the platform and nobody even really knows eBay Live exists. There's an application process β I talked to sellers and they're telling me they've applied to be a seller and they are waiting to get approved. The TAM is like $400 billion. It's growing very quickly in the US. It's very popular in Asia. eBay Live should be significantly the category leader, and they have at max a few hundred people watching their sales.
The benefit we have with the stores beyond fixing the platform β using the stores, there's 1,600 essentially nodes that can be used as studios for creators. They could be used as fulfillment and logistics, and ultimately allowing sellers and content creators to do what they do best: create content. We can help them on photography, fulfillment, logistics, and we can also do the authentication.
This is something I have not spoken about before publicly. eBay today is the leader in physical collectibles. I would extend that into digital collectibles. If you look at all these in-game items β AAA titles, skins, weapons β taking eBay and building a marketplace where you can provide liquidity for in-game digital items. It's what NFTs could have been β people thought they were β but ultimately they had no real utility. In-game items actually have real utility. If you look at trading cards, it's a piece of cardboard in a piece of plastic. But there's no marketplace providing liquidity for in-game digital items. That addressable market could be much larger than eBay's marketplace on physical items, and no one's doing it. It's crazy that it doesn't exist.
The deal structure: 50% cash, 50% GameStop stock. The combined company β in the near to medium future, the earnings are coming from eBay. So they're going to continue owning eBay. They get to continue owning eBay, except you've got someone that is highly incentivized to maximize shareholder value, knows a thing or two about e-commerce and running the business efficiently.
>> Why not go all cash? Why not raise the capital?
>> That is not what we've presented today and that's a lot of cash to come up with. We don't have $60 billion of cash just lying around.
>> My understanding is there was recently a rejection on the ability to call a special shareholder meeting β a vote that failed to reduce the threshold to 10% of shares outstanding. It's currently at 20%.
>> Yeah, it was close, but that's right.
I don't want to get into individual shareholder discussions, but the consensus has generally been aligned β they love the business and they see a lot of opportunities. If you love the business, you might not want 50% cash, you might want to stay invested. Ultimately the vote is on who's going to be a better fiduciary of capital and who can grow this business β me or someone that's basically selling stock hand over fist, and by the way has not bought a single share of stock in the open market with his own money and has been selling tens of millions of dollars.
This is going to be coming out β it hasn't been filed yet, maybe by the time this airs it will be. I'm putting $500 million of my own money into this transaction. I haven't pulled a penny out of GameStop. I've invested a lot of money into GameStop. GameStop's a much stronger business today. You've got a management team with no skin in the game. They're not builders. They haven't built anything themselves before. They've basically just been employees at major companies that have been overpaid. I don't think they've ever broken a sweat in their entire lives. Why does everyone want them to succeed? There's nothing more American than basically risking your own capital. So why does everyone want us to fail?
>> Have you sat down with their CEO?
>> I would love to. He won't take the meeting. I would fly to California tomorrow.
>> And you're the guy that's going to fire him, but he's going to get a payday, right?
>> A big payday. It's over 100 million bucks.
>> Have you met with any of the board members? Have you reached out?
>> No. No.
The great thing about markets β they don't care what the media says. On the short term, they might. It's a voting machine, but on the long term, it's a weighing machine. And if the performance continues to be delivered at GameStop, people that might want to see the company fail are going to lose because you're going to get the weight. That's ultimately what's going to matter more than anything here.
I would assume that at this point, seeing the results at GameStop, folks have to start paying attention that this isn't just a meme stock.
I do think that the media, in order to give you credibility, they're going to have to acknowledge that all of their takes on GameStop just being a meme stock were wrong β and that there is actually a business here, and that there is value being created here, and they missed that and got the story completely wrong. Everyone got caught up in the frenzy of the meme stock craze. Once everyone agrees with it, no one's allowed to rewrite history. To maintain their credibility, they have to continue to make you seem less credible.
>> Your next steps β are you going to go hostile? Going to do a tender? How's this going to go?
>> I'm going to do whatever I need to do in order to succeed.
It's a lot of money, it's a big premium, and beauty is in the eye of the beholder. It makes sense for me to pay this for the business because of what I could do with the business β not just short-term in terms of increasing the earnings, but long-term in terms of really taking significant market share in live commerce and building a digital marketplace for gaming. That's something an existing management team would never be able to build in their wildest dreams. I don't know why they won't speak to me. They should, because I'm not going to stop. I'm not going to go away.
People could come along and buy the shares on the open market and vote in favor of your offer. The shareholder base can turn over, and if people like the premium on the stock today and they don't want to own GameStop stock tomorrow, there's probably going to develop a good market for trading the shares if the market starts to believe your story. There's a lot of different escalation paths in our toolkit.
>> Are you working with bankers?
>> Yeah, we're working with bankers and high-priced advisors.
>> Ryan, this has been awesome to get to know you and hear about your history and your vision for where you want to take GameStop and eBay. Really, man, the best of luck to you in the process and thanks for speaking with us.
>> I appreciate it. Great speaking to you, Dave.